The Unbearable Lightness of Property - alastairhudson.com

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contract for services whereby some person will be limiting their liability and identifying their fee in return for acting as trustee. To that extent, yes, there will be a contract. To that extent, the Court of Appeal has held that this contract ought to limit even trustees’ liability for breach of trust if the terms of the contract require that – even where the trustee has been guilty of gross negligence. 60 However, many express trusts arise without a contract in will trusts and in situations like Paul v. Constance 61 or Re Kayford 62 where the parties do something akin to a trust but which they may not necessarily have described as a trust – these may occur naturally in the wild in great profusion but they are unlikely to have enough at stake to reach the Chancery courts. However, to return to the central argument of Langbein’s essay: trusts should be considered as being contracts at root and therefore it should not matter that there is or is not a beneficiary who can satisfy the beneficiary principle. This is particularly important for a range of vehicles used to hold assets for tax avoidance purposes whereby those who contribute to a fund might wish to appear to have no beneficial interest in that fund for tax purposes but nevertheless be able to rely on the munificence of a discretionary trustee looking favourably upon them when the time comes to distribute the fruits of the fund. It is important that no individual be identifiable as a beneficiary for two reasons. First, so that no revenue authority can identify any profit-generating property in any of the participants. Second, so that no individual can claim entitlement to the fund in the absence of any other and so establish a beneficial claim to the fund ahead of the participants. This second feature means that there is no beneficiary capable of satisfying the beneficiary principle. The claims of Langbein and others in this line that trusts should be considered to be contracts are therefore intended to serve that well-heeled community of cosmopolitans who wish to increase the lightness of their property ownership not only by converting entirely into cash flow without the wearying difficulties of ownership but also by denying the very fact of their ownership while still being reassured that they will receive an income stream as though the recognised owner of the property! Double the lightness, half the risk. Ownership without ownership, wealth without responsibility, property without weight! Investment trusts as contracts Aside from the fiscal benefits of the trust-as-contract considered immediately above, there are other analyses of various types of trust as being, in essence, merely contracts. The most obvious is that of Sin in relation to unit trusts: Sin suggests that a unit trust ought not to be considered to be a trust at all but that it ought properly to be considered to be a purely contractual relationship. 63 Sin’s argument is based on the simple proposition that the purpose of entering into a unit trust arrangement is to generate a cash flow for the investor (or, “participant”). It is this contract effected between the participants and the scheme manager (who conducts all of the investment business on behalf of the participants) which Sin contends is the true substance of the arrangement as opposed to any property law arrangement. 60 Armitage v. Nurse [1998] Ch 241. 61 [1977] 1 WLR 527. 62 [1975] 1 WLR 279. 63 Sin, The legal nature of the unit trust, Oxford University Press, 1997. 18
It may be worthwhile probing this argument a little further by considering the nature of a unit trust arrangement. 64 A collection of (usually) unconnected investors contribute capital to the unit trust’s fund and in return are allocated a given number of units in the total fund. That pool of investment capital is then invested by the scheme manager and the profits, if any, shared out in proportion to each participant’s holding of units. Title in the unit trust rests with the trustee, an officer unconnected with the investment business of trust but required to be a person distinct from the scheme manager so that one fiduciary is able to supervise the activities of the other. I cannot agree with Sin’s argument. Further to s.237(1) of the Financial Services and Markets Act 2000 it is clear that the term “‘unit trust scheme’ means a collective investment scheme under which the property is held on trust for the participants.” That there is a trust is therefore beyond doubt. What is less clear, however, in fairness to Sin is, first, whether or not we would consider such an arrangement to be a trust in the absence of that statutory provision and, second, whether or not the scheme manager is to be considered to be a trustee. Whether a unit trust is a trust Sin centres on four areas in which classic trusts law thinking does not apply to the unit trust: the absence of a settlor, the bicameral nature of the trustee function, the unsuitability of the rule in Saunders v. Vautier in this context, and the nonapplicability of many of the rules of formality. To focus on the question of whether or not there needs to be a settlor or any of the ordinary formalities, the Australian caselaw has expressed the manager, who does create and market the unit trust commercially, as being in fact a settlor. 65 In New Zealand there is authority for the proposition that when the manager brings the unit trust into existence that is an act which is sufficient to qualify the manager as a settlor. 66 The New Zealand authorities accept that there is a trust but that the value contributed to the unit trust results from the subscriptions of the participants and not from the original action of the manager in creating the trust. However, that is no different, it is suggested from the creation of a pension fund trust. There is English law authority for the proposition that the participant is not settling property when subscribing for units within s.164(1) of the Law of Property Act 1925. 67 Rather that contribution is in consideration for the receipt of contractual rights derived from the investment of the unit trust. Understanding the forms of trust It is important to understand the three forms of express trust which might be said to exist. The first form was the conscious express trust which arises in circumstances in which a settlor has an explicit intention to create a trust. The unconscious express 64 Hudson, The law of investment entities, Sweet & Maxwell, 2000, 199. 65 Truesdale v. FCT (1969) 120 C.L.R. 353, a case involving the tax effects of settlement; Famel Pty. Ltd v. Burswood Management Ltd (1989) 15 A.C.L.R. 572, per French J.. 66 Baldwin v. CIR [1965] N.Z.L.R. 1; Tucker v. CIR [1965] N.Z.L.R. 1027: both cases concerning the question of creating a trust in the context of taxation. 67 Re AEG Unit Trust (Managers) Ltd’s Deed [1957] 1 Ch. 415, 420, per Wynn-Parry J.. 19
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